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Consultants present preliminary water utility report

With a substantial wealth of data now at their fingertips, City Council members will have plenty to consider as they move forward in determining the future of the city’s water utility.

The good news for ratepayers is that any option the council chooses will result in at least a 30 percent rate reduction.

GHD Consulting, which was hired to analyze the future operations, management and financing of the water utility, presented its preliminary findings to the council and the Utility Advisory Committee at Wednesday’s meeting.

The data-driven, detailed presentation looked at the three parties interested in the utility: the current operator, the City of Bainbridge Island (COBI), the Kitsap Public Utility District (KPUD) and the private company Washington Water Service Company (WWSC).

KPUD gave the city a proposal in the fall outlining the service it would provide if it took over the utility. KPUD already owns and manages several other island water systems. The WWSC, which already owns two small water systems and manages three others on the island, expressed its interest to the GHD team.

The preliminary findings still have major unknowns, including many legal questions, which the GHD team will attempt to address before it issues a final report and formal recommendation to guide the council in making a decision.

Thomas Keown of the consulting team presented the preliminary results.

One of the primary concerns about the water utility is the rates. According to a 2010 study by the Association of Washington Cities, the average monthly residential water rate for a single family was about $35. City ratepayers dish out about $64.

In order to compare options, the GHD team compared the three parties and the choices within them.

COBI options

GHD found that it could immediately drop current rates by approximately 34 percent.

Public Works Director Lance Newkirk said the GHD team came to that conclusion after looking at the way the city did its Capital Improvement Plan (CIP) reassessment heading into 2011 and 2012.

The consultants found that the changes in capital needs, in addition to the resulting changes in operations, could allow the city to entertain an immediate rate reduction.

That reduction would drop current rates from $64 to $43, and could theoretically be done immediately.

The city employees assigned to the water utility dropped from 10.2 employees full-time employees (FTE) in 2009 to 6.5 in 2011, but it performs below industry standards in areas like pipeline miles and connections per employee, according to GHD.

To optimize the utility, GHD said the city could adjust rates to about a 45 percent savings by eliminating $230,000 in salaries and benefits (about 2.5 FTE), and reducing customer service activities. Rates would drop to about $36, which would be the cheapest option of all for ratepayers.

The optimized utility would still maintain the required levels of service, water resources and water financial reserves.

The third option within the city is to expand the existing utility to increase customers for a greater economy of scale, which could save ratepayers 34 to 45 percent. An estimated rate was not presented.

An increased utility would not require any FTE reductions, but does carry a host of what ifs, including finding owners willing to sell.

KPUD options

If KPUD were to manage the utility the rates could be dropped 30 to 35 percent.

The city would need to eliminate $600,000 in salaries and benefits (6.5 FTE) and cover the initial cost of the transition, which has not been estimated yet.

The transition costs could include labor negotiations, decisions related to existing outside contracts and other unknowns.

Newkirk said it has not yet been decided whether the prices of all of those unknowns will be determined in the final report.

If COBI was to transfer or sell ownership of the utility to KPUD, then rates could drop about 35 percent to around $42.

The GHD team estimated the market value of the utility is around $2.3 million.

Exactly where the money will go – or who it belongs to – is yet to be determined.Keown said that at this time he believes the proceeds of a sale would go back to the ratepayers.

In its fall 2010 report, KPUD said it would need three years worth of capital costs to cover future funding for some of the aging infrastructure. The city would have to determine how to cover those costs, and where the existing water utility reserves would go.

Since KPUD is a government-entity it would be a similar transition from COBI ownership, which could be a positive, Keown said.

KPUD is restricted by state RCW that it cannot provide sewer operations because it was not included in the initial KPUD charter, Newkirk said. Should KPUD decide it wants to operate the sewer it would have to go to a vote of the people because it’s a public utility district. Councilor Kim Brackett said that may be something to consider in the future.

WWSC options

With a management contract with WWSC, customers would save between 22 to 27 percent for a rate around $47.

Like KPUD management, the city would need to eliminate 6.5 FTE personnel totaling $600,000.

One major difference between KPUD and WWSC is that the latter is a private, for-profit company. Any savings would benefit shareholders, and Keown mentioned that public perception of privatized water may be a deterrent. WWSC is a subsidiary of a California water company.

WWSC would be able to provide a similar service to KPUD and the city and GHD found the management to meet all of its benchmarks.

Next steps

Councilor Bob Scales commended Keown and the consulting team for their report.

“As a policy maker that is one of the best presentations I have ever seen,” said Scales. “I came into this process completely open minded to hear all the options. What is clear is the council is going to have a very comprehensive amount of information to make a policy decision.”

The council asked the UAC for more input. The UAC will formulate questions and get them to the consultants before June 1. The consultants will work with the UAC through those questions before they present their final report and recommendation at the end of June.

According to the city's strategic plan the consulting team is to report their final report and recommendation in the third quarter. The final report will be given at the end of June, prior to the beginning of the city's budget season. The future of the water utility will have a major impact on the 2012 - 2013 budget depending on what decision is made.

The consulting team still has some considerable unknowns to consider. Many include the legal issues, which the consulting team will likely have to discuss with the city attorney.

Questions like what are the legal requirements if the city wants to transfer or whether the city needs to go to a vote of the entire city or just to the ratepayers still need to be answered.

At the end of June, Newkirk said he expects a similar discussion with the council and the UAC, when the consulting team releases their final report.

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